August currency review

Argentina's peso has taken another deep dive following an unexpectedly big defeat for President Macri in primary elections in August. Capital controls have been introduced to try to stabilise the currency.

The primaries have generally been a sound indicator of who is likely to win the next presidential election, and investors are now worried that the Peronist candidate, Alberto Fernandez, will triumph in October. With the Peronists' long history of nationalising private companies without sufficient recompense, extremely generous public subsidies and excessive money printing to pay for it all, funding is being pulled from Argentina rapidly and sending the peso crashing. Peronists always hope to help the poor, of course, but the results of their policies time and time again have been soaring inflation, which hits the poor hardest, and economic imbalances, which tend to weaken productivity and promote considerable corruption.

When a government does what the markets seem to want, and Macri has done most of that in his four years in office, including floating the peso, cutting the fiscal deficit, ending subsidies, investing in oil and gas industries and introducing honesty to official economics statistics, it might expect to be rewarded with patience. However, international investors are not renowned for their loyalty and, in Argentina's case they know the next Peronist government is probably just around the corner. The problem is that, when next a market-friendly government takes serious steps to repair Argentina's long-suffering economy, investors will be even less likely to believe the changes are permanent and so will mostly limit themselves to short-term investments which can be easily pulled, as they have done under Macri.

And so it goes on, begging the question: is it even possible for Argentina to square the circle under the current global financial system?

Countries experiencing largest currency losses in August

Country

Currency code

Movement v EUR
29 Jul - 2 Sep 2019 (%)

Inflation
(%)

Argentina

ARS

-26

54.4

Brazil

BRL

-9

3.2

Colombia

COP

-6

3.4

South Africa (Lesotho, Namibia, Swaziland)

ZAR (LSL,NAD, SZL)

-6

4.5 (5.6, 3.6, 1.6)

Uzbekistan

UZS

-8

14.3

Venezuela

VES

-53

282972.8

Threats from abroad to withdraw investments and scrap trade deals with Brazil, as President Bolsonaro appeared to let the Amazon burn, were the primary cause of the real's 9% slump in August.

Colombia's peso was hit as some FARC rebels announced they were taking up arms against the government again. A ruinous 50-year civil war ended in 2016, but the peace agreement has never felt completely secure.

The 8% fall in the value of the Uzbekistani som was mainly due to deterioration in the country's current account deficit, meaning the gap between what it imports and exports is widening. However, as the majority of imports recently have been of machinery and equipment, which should give long-term benefits to the developing economy, depreciation of the currency may even be considered a sign of strength.

Our old friend, the Venezuelan bolivar, was once again the world's weakest currency during August. Its long demise has been well documented in this blog and elsewhere, and there remains little sign of progress towards resolving the country's crisis. However, the worthlessness of the bolivar has led to creeping dollarisation in the economy, which is producing some stabilisation. Also, recent revelations of secret talks between President Maduro's regime and the US have given hope to some.

Countries experiencing largest currency gains in August

Country

Currency code

Movement v EUR
29 Jul - 2 Sep 2019 (%)

Inflation

(%)

Japan

JPY

+3

0.7

Malawi

MWK

+5

9.0

Pakistan

PKR

+3

10.3

Few currencies gained significant ground against the euro in August, as the table above shows.

Despite the political chaos on show in the United Kingdom over Brexit, and headlines about the pound's weakness, Britain's currency only fell 1% against the euro and 3% against the dollar in August. This shows the resilience of developed economies' currencies generally, even during a crisis which would no doubt have hammered the currency of an emerging economy in similar circumstances. For such a complex, broad-based economy as the UK's, the sheer number of factors affecting exchange rates tends to mitigate against precipitous devaluations. The pound might find support today if parliament pushes through legislation that should go a long way towards blocking a no-deal Brexit, as it is expected to do.